Political Economy of Debt Relief: the Theoretical Background of the HIPC Initiative
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| Year of publication | 2009 |
| Type | Appeared in Conference without Proceedings |
| MU Faculty or unit | |
| Citation | |
| Description | Debt restructuring and cancellation operations carried out in the last few years contributed to a reduction of debt burdens in some less developed countries. However, the current global economic crisis is jeopardizing these gains. Decrease in international trade and availability of foreign capital are having a negative impact on the fragile economies of the least developed countries. It is therefore likely that once the crisis subsides, many economies will be in a strong need for debt relief. This highlights the need to assess to which extent the HIPC Initiative lived up to its expectations. The initiative has been challenged and doubted on many grounds. While some question its very foundations of ideological and theoretical nature, others point out to the inadequate setup of the debt relief operations as the main reason for its alleged failures. This paper deals primarily with the former, accentuating the theoretical backing of the initiative (i.e. the debt overhang theory) and its validity in the light of empirical data. The objective of the paper is to test whether data support one of the theorys arguments, concretely that high debt reduces investment. Although debt relief in the post-completion point countries is found to be associated with higher investment, it is not clear whether there is any causal relationship between the two. Higher investment can also be fostered by conditions attached to the initiative or other external factors, rather than debt reduction itself. |
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